through the grapevine - foster school of business...harvesting | pressing | fermenting | clarifying...

Through the Grapevine

BrandonNaluai |KaleiMunsell|Aarthi Ganapathi |ChrisCave

Harvesting the Grapes

Wine Variety


SalesofStillRedWinebyGrape/VarietalType:%TotalVolume2016

%totalvolume 2016.00CabernetFranc 10.00

CabernetSauvignon 34.30CabernetSauvignon/Shiraz 9.80

Merlot 23.60

MuscatHamburg 2.80

Others 19.40

Total 100.00

SalesofStillWhiteWinebyGrape/VarietalType:%TotalVolume2016

%totalvolume 2016.00

Chardonnay 69.20

DragonEye 6.30

Riesling 1.10

Others 23.40

Total 100.00

Washington China

International Wine Industry

BiggestdropinChardonnayMarket


Spain and ItalyFacing Drought

(-23%)

AustraliaCan’t Fulfill Demand

FranceRecord Low Harvest

(-19%)

Pressing the Grapes

Target Market Gina Xiao

Female

16– 35yearsoldPost“One-Child”policy

Tech-Savvy

Bilingual

ValuesentertainmentNotextremelypricesensitive


Yunnan

Hunan

Guizhou

BeijingSichuan

Shanghai

Geographic Breakdown


Fermenting the Grapes

Clarifying the Wine

Reachtargetmarketviapopculturecampaigns

Integratedads

Bannerads

Interactiveads

Advertising

Reachtargetmarketviapopculturecampaigns

SponsorshipofKoreanSoapOperas

Advertising

Aging the Wine

Expected Market CaptureExpectedMarketCapturein2018=.386%=26M BottlesSold

CaptureMarketShareby2021=0.490%=38.2MBottlesSold


Net Present Value


for Washington Wineries

Generates an NPV of

$147.6Million

Bottling the Wine

PreparingemployeesandITinfrastructuretointegrateproposedsystems

SELECTWINERIES&CHINESEPARTNERS

JD.com,Alibaba,Pudao Wine,etc.

EXPANDINTOOTHERONLINECHANNELS

Implementationofbuildingmanagementprogramstomeasureand

optimizeenergyusage

SELECTDISTRIBUTORS&SHIPTOSELL

LaunchwinesaleswithAmazonChina

ENTERCHINESEMARKET&LAUNCHWINECLUB

Nov2017– Jan2018(3Months)

July- Dec2018

Jan– May2018(6Months)

May2018

Implementation Timeline

HARVESTING|PRESSING|FERMENTING|CLARIFYING|AGING|BOTTLING|TASTING

Segment Analysis

Washington Wine Industry

Washington Wine Variety

International Wine Industry Target Market Geographic

Breakdown Internet Analysis

Regulatory Considerations

AdvertisingWeChat

AdvertisingKorean Soap

OperasWine Clubs Sales Expected Market

Capture

International Competitor

Analysis

Net Present Value

Implementation Timeline

Wine Grape Quantity Utilized

and Average Price

Wine Sales by Percent of Total

Volume

Sensitivity Analysis –

Growth Rate

Percentage of Off-Trade Sales

Sensitivity Analysis of Cost

Wine Recommendatio

ns

Online Distributors

Chinese Flavor Preference

Chinese Labelling

Requirements

Required Documentation

Top Down Financial Analysis

SWOT of Washington

Wine

Appendix


Table15SalesofStillWhiteWinebyGrape/VarietalType:%TotalVolume2011-2016

%totalvolume 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00Chardonnay 66.00 67.00 68.00 68.40 68.90 69.20

DragonEye 9.00 9.00 8.00 7.00 6.60 6.30

Riesling 1.00 1.00 1.00 1.10 1.10 1.10

Others 24.00 23.00 23.00 23.50 23.30 23.40

Total 100.00 100.00 100.00 100.00 100.00 100.00

Table14SalesofStillRoséWinebyGrape/VarietalType:%TotalVolume2011-2016

%totalvolume 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00Merlot 70.00 69.00 68.00 67.00 66.50 66.00

Others 30.00 31.00 32.00 33.00 33.50 34.00

Total 100.00 100.00 100.00 100.00 100.00 100.00

Table13SalesofStillRedWinebyGrape/VarietalType:%TotalVolume2011-2016

%totalvolume 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00CabernetFranc 10.00 10.00 10.00 10.10 10.00 10.00

CabernetSauvignon 37.00 36.00 35.00 34.00 34.20 34.30CabernetSauvignon/Shiraz 10.00 10.00 10.00 10.00 9.90 9.80

Merlot 17.00 20.00 23.00 23.50 23.60 23.60

MuscatHamburg 4.00 3.00 3.00 2.90 2.80 2.80

Others 22.00 21.00 19.00 19.50 19.50 19.40

Total 100.00 100.00 100.00 100.00 100.00 100.00

Wine Salesby Percentof Total Volume


Wine Salesby Percent Off-TradeVolume

Table12SalesofOtherSparklingWinebyPriceSegment:%Off-tradeVolume2011-2016

%off-trade 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00

CNY30toCNY49.99 6.80 5.80 4.90 4.70 4.60 4.50

CNY50toCNY59.99 5.40 4.80 4.30 4.20 4.10 4.10

CNY60toCNY89.99 42.40 41.30 40.90 40.60 40.70 40.80

CNY90andabove 45.30 48.10 50.00 50.60 50.60 50.70

Total 100.00 100.00 100.00 100.00 100.00 100.00

Table11SalesofStillWhiteWinebyPriceSegment:%Off-tradeVolume2011-2016

%off-trade 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00

CNY50toCNY59.99 2.90 2.80 2.60 2.50 2.30 2.20

CNY60toCNY89.99 13.50 12.70 12.00 11.30 11.30 11.40

CNY90andabove 83.60 84.50 85.40 86.20 86.30 86.40

Total 100.00 100.00 100.00 100.00 100.00 100.00

Table10SalesofStillRoséWinebyPriceSegment:%Off-tradeVolume2011-2016

%off-trade 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00

CNY50toCNY59.99 2.60 2.50 2.40 2.30 2.10 2.00

CNY60toCNY89.99 12.20 11.60 10.90 10.30 10.20 10.00

CNY90andabove 85.20 85.90 86.70 87.40 87.70 88.10

Total 100.00 100.00 100.00 100.00 100.00 100.00

Table9SalesofStillRedWinebyPriceSegment:%Off-tradeVolume2011-2016

%off-trade 2011.00 2012.00 2013.00 2014.00 2015.00 2016.00

CNY30toCNY49.99 1.40 1.30 1.30 1.30 1.20 1.20

CNY50toCNY59.99 5.20 5.00 5.00 5.00 4.80 4.70

CNY60toCNY89.99 30.60 28.90 29.10 29.30 29.40 29.50

CNY90andabove 62.80 64.80 64.60 64.40 64.60 64.60

Total 100.00 100.00 100.00 100.00 100.00 100.00


Percentage of Off-Trade Sales

PercentageofOff-TradeSalesthatareSoldareReq'd PricePointforEachGrape-WineCategoryCNY90andabove (USD13.63+) 2011 2012 2013 2014 2015 2016

Average

StillRedWine 62.8% 64.8% 64.6% 64.4% 64.6% 64.6% 64.3% StillRoseWine 85.2% 85.9% 86.7% 87.4% 87.7% 88.1% 86.8% StillWhiteWine 83.6% 84.5% 85.4% 86.2% 86.3% 86.4% 85.4%

WashingtonChardonnay 3,097hectares 7,654acres

CabernetSauvignon 4,165hectares 10,293acresMerlot(Red) 3,333hectares 8,235acres

1Ton=60Cases=720BottlesChardonnay 45000 tons

CabernetSauvignon 71100 tonsMerlot 48400 tons

= Chardonnay 2,700,000.00 Cases

CabernetSauvignon 4,266,000.00 CasesMerlot 2,904,000.00 Cases

= Chardonnay 1,944,000,000.00 Bottles

CabernetSauvignon 3,071,520,000.00 BottlesMerlot 2,090,880,000.00 Bottles

Wine Recommendations


RedWine- TotalVolume(%)CabernetSauvignon 34% Merlot 24%

Total 58%

(CabSauv &Merlotmakeup58%oftotal

RedWineSalesbyVolume)

RoseWine- TotalVolume(%)

Merlot 66%

(MerlotMakesup66%oftotalRoseSalesby

Volume)

WhiteWine- TotalVolume(%)Chardonnay 69.20% DragonEye 6.30%

Total 75.50%

(Chardonnay&DragonEyemakeup75.5%oftotalWhiteWineSales

perVolume)

Top Down Financial Analysis 1


1

Assumption:StillLightGrapeWineLitersAssumessameAverage%ofOff-Tradeasisthetotal(49.41%)

Year 2016 2017 2018 2019 2020 2021Chinatotal 4,581,506,700.00 4,821,864,300.00 5,072,051,900.00 5,326,921,000.00 5,584,573,900.00 5,842,636,400.00 Average%ofTotal CAGRStillLightGrapeWine 2,218,200,000.00 2355500000 2496900000 2641200000 2786500000 2930800000 49.41% 0.04752464-StillRedWine 1636600000 1742100000 1851400000 1963000000 2075200000 2186400000 36.68% 0.04945667-StillRos‚Wine 63700000 66600000 69400000 72300000 75100000 77900000 1.36% 0.03410905-StillWhiteWine 517900000 546700000 576000000 605900000 636100000 666500000 11.36% 0.04293932AverageLightGrape/China(%ofTotal) 48.4% 48.9% 49.2% 49.6% 49.9% 50.2%

Year 2016 2017 2018 2019 2020 2021Off-TradeLitres(Total) 3,090,100,000.00 3,208,871,752.55 3,332,208,641.89 3,460,286,134.61 3,593,286,441.57 3,731,398,777.12StillLightGrapeWineLiters 1,526,677,633.78 1,585,357,345.81 1,646,292,483.95 1,709,569,738.26 1,775,279,130.81 1,843,514,143.79StillRedWineOff-TradeAdjustedVolume 1,133,418,948.07 1,176,983,284.12 1,222,222,068.42 1,269,199,660.43 1,317,982,893.34 1,368,641,169.15StillOff-TradeRedWineSoldatReq'dDistroPrice 64.300% 64.300% 64.300% 64.300% 64.300% 64.300%Off-TradeRedWineSoldatorabovePricePoint 728,788,383.61 756,800,251.69 785,888,790.00 816,095,381.66 847,463,000.42 880,036,271.76StillRoseWineOff-TradeAdjusted 42,052,873.75 43,669,227.11 45,347,706.97 47,090,701.26 48,900,689.64 50,780,247.14StillOff-TradeRoseWineSoldatReq'dDistroPrice 86.833% 86.833% 86.833% 86.833% 86.833% 86.833%Off-TradeRoseWineSoldatorabovePricePoint 36,515,912.04 37,919,445.54 39,376,925.56 40,890,425.59 42,462,098.84 44,094,181.26StillWhiteWineOff-TradeAdjusted 351,176,127.58 364,674,009.24 378,690,698.41 393,246,136.07 408,361,029.69 424,056,882.63StillOff-TradeWhiteWineSoldatReq'dDistroPrice 85.400% 85.400% 85.400% 85.400% 85.400% 85.400%Off-TradeWhiteWineSoldatorabovePricePoint 299,904,412.95 311,431,603.89 323,401,856.44 335,832,200.20 348,740,319.35 362,144,577.76TotalOff-TradeWineSoldatorabovePricePoint 1,065,208,708.60 1,106,151,301.12 1,148,667,571.99 1,192,818,007.45 1,238,665,418.61 1,286,275,030.79

2

1.AnalysisofLightGrapeWineSalesinChina

2.TotalOff-TradeLight-GrapeWineSoldatoraboverequiredprofitableprice



3.OnlineSalesanalysisofLight-GrapeWineSoldatoraboverequiredpriceof90Yuan($13.58)

3

Off-TradeVolume(Liters) CAGR(2011-16) 0.038436216 OnlineSalesCAGR(2014-16) 0.27Year 2016 2017 2018 2019 2020 2021Off-TradeLitres(Total) 3,090,100,000.00 3,208,871,752.55 3,332,208,641.89 3,460,286,134.61 3,593,286,441.57 3,731,398,777.12OnlineSales(Off-Trade-CAGR-basedGrowth) 597,800,000.00 620,777,170.21 644,637,495.91 669,414,922.26 695,144,699.13 721,863,431.27OnlineSalesCAGRgrowth 597,800,000.00 756,998,953.38 958,593,869.89 1,213,875,135.87 1,537,139,858.46 1,946,492,579.55OnlineSalesGrowthModel(Average) 597,800,000.00 688,888,061.80 801,615,682.90 941,645,029.06 1,116,142,278.79 1,334,178,005.41LightGrapeLitersofOnlineSales 289,433,159.62 336,524,574.02 394,624,155.69 466,887,504.20 556,914,549.89 669,254,191.18StillRedWine%ofTotalSales(ModelAssumption) 35.722% 36.129% 36.502% 36.851% 37.160% 37.421%StillOff-TradeRedWineSoldatReq'dDistroPrice 64.300% 64.300% 64.300% 64.300% 64.300% 64.300%RedWineSoldOnlineatorabovereq'dprice 137,309,664.01 160,036,014.88 188,145,462.40 223,121,917.99 266,686,141.95 321,029,918.38StillRoseWine%ofTotalSales(ModelAssumption) 1.390% 1.381% 1.368% 1.357% 1.345% 1.333%StillOff-TradeRoseWineSoldatReq'dDistroPrice 86.833% 86.833% 86.833% 86.833% 86.833% 86.833%RoseWineSoldOnlineatorabovereq'dprice 7,217,278.93 8,262,174.76 9,524,198.97 11,097,770.32 13,033,346.06 15,446,455.85StillWhiteWine%ofTotalSales(ModelAssumption) 11.304% 11.338% 11.356% 11.374% 11.390% 11.408%StillOff-TradeWhiteWineSoldatReq'dDistroPrice 85.400% 85.400% 85.400% 85.400% 85.400% 85.400%WhiteWineSoldOnlineatorabovereq'dprice 57,710,038.81 66,702,270.80 77,743,281.94 91,468,126.81 108,570,736.33 129,975,932.28



Year 2016 2017 2018 2019 2020 2021Liter:BottleConversion 1.333333333 1.333333333 1.333333333 1.333333333 1.333333333 1.333333333RedWineBottlesSoldinReq'dPriceRangeonline 183,079,552.00 213,381,353.00 250,860,616.00 297,495,890.00 355,581,522.00 428,039,891.00RoseWineBottlesSoldinReq'dPriceRangeonline 9,623,038.00 11,016,233.00 12,698,931.00 14,797,027.00 17,377,794.00 20,595,274.00WhiteWineBottlesSoldinReq'dPriceRangeonline 76,946,718.00 88,936,361.00 103,657,709.00 121,957,502.00 144,760,981.00 173,301,243.00RecommendedRedWineProducts:Cab.Sauv.&Merlot(%ofredprod.) 58% 58% 58% 58% 58%RecommendedRoseWineProducts:Merlot 66% 66% 66% 66% 66%RecommendedWhiteWineProducts:Chardonnay&DragonEye(%whiteprod.) 75.50% 75.50% 75.50% 75.50% 75.50%RedWineBottlesSoldinCategory,online,andinpricepoint 123,547,803.39 145,248,296.66 172,250,120.31 205,881,701.24 247,835,096.89RoseWineBottlesSoldinCategory,online,andinpricepoint 7,270,713.78 8,381,294.46 9,766,037.82 11,469,344.04 13,592,880.84WhiteWineBottlesSoldinCategory,online,andinpricepoint 67,146,952.56 78,261,570.30 92,077,914.01 109,294,540.66 130,842,438.47Agerangereduction(targetyoungerpopulationonline) 75% 75% 75% 75% 75%TotalPotentialSalesinCategory 148,474,102 173,918,371 205,570,554 244,984,189 294,202,812TotalChinaBottleSalesEquivalency(ifallLitresconvertedtobottles) 6,429,152,400 6,762,735,866 7,102,561,333 7,446,098,533 7,790,181,866TargetMarket%Sales(byVolume)ofTotalWine-BuyingPopulation 2.31% 2.57% 2.89% 3.29% 3.78%AverageSalesPrice(inUSD) 10.63$ 10.63$ 10.63$ 10.63$ 10.63$CosttoMarket 8.86$ 8.86$ 8.86$ 8.86$ 8.86$ExpectedNet-Profit 1.77$ 1.77$ 1.77$ 1.77$ 1.77$ProfitperbottlewithWineClubUnitCosts 1.52$ 1.52$ 1.52$ 1.52$ 1.52$ExpectedMarketCaptureofSales(inbottles) 1,484,741.02 26,087,755.65 31,566,184.34 34,722,802.77 38,195,083.05WineMarketCapture 0.023% 0.386% 0.444% 0.466% 0.490%Revenue 15,785,766.52$ 277,365,018.07$ 335,611,671.87$ 369,172,839.05$ 406,090,122.96$NetProfit 2,262,626.54$ 39,755,652.59$ 48,104,339.63$ 52,914,773.60$ 58,206,250.96$

Marketing 2,000,000.00$ 3,000,000.00$ 3,000,000.00$ 2,000,000.00$ 2,000,000.00$NetProfitAfterMarketing 262,626.54$ 36,755,652.59$ 45,104,339.63$ 50,914,773.60$ 56,206,250.96$DiscountRate 10%NPV 147,595,818.58$ CAGR 10%

4.AnalysisofChinesepreferencetoWashingtonproductioncreatingnewTargetSales5.Expectedmarketcapture,sales,revenue,andprofitforWashington-baseddistributors6.NPVCalculationafterfactoringinsharedproductcosts.DiscountRate=10%

4

5

6

Sensitivity Analysis – Growth Rate


2017 2018 2019 2020 2021 NPVWorst 0% 1,484,741.02 26,087,755.65 26,087,755.65 26,087,755.65 26,087,755.65 118,207,427.89$Low 5% 1,484,741.02 26,087,755.65 28,761,750.60 30,199,838.13 31,709,830.04 132,135,041.88$Middle 10% 1,484,741.02 26,087,755.65 31,566,184.34 34,722,802.77 38,195,083.05 147,595,818.58$High 15% 1,484,741.02 26,087,755.65 34,501,056.85 39,676,215.37 45,627,647.68 164,699,730.26$Best 20% 1,484,741.02 26,087,755.65 37,566,368.14 45,079,641.76 54,095,570.12 183,560,822.24$

Cost Sensitivity Analysis


2017 2018 2019 2020 2021 NPVWorst 0.68$ 1,009,623.89$ 17,739,673.84$ 21,465,005.35$ 23,611,505.88$ 25,972,656.47$ 60,280,353.56$Low 1.01$ 1,499,588.43$ 26,348,633.21$ 31,881,846.18$ 35,070,030.80$ 38,577,033.88$ 94,423,522.88$Middle 1.52$ 2,262,626.54$ 39,755,652.59$ 48,104,339.63$ 52,914,773.60$ 58,206,250.96$ 147,595,818.58$High 2.28$ 3,385,209.53$ 59,480,082.88$ 71,970,900.29$ 79,167,990.32$ 87,084,789.35$ 225,822,992.71$Best 3.42$ 5,077,814.29$ 89,220,124.32$ 107,956,350.43$ 118,751,985.47$ 130,627,184.02$ 343,772,123.10$

Online Distributors


Chinese Flavors


Chinese Labelling Requirements


Name/brandofproductIngredientslist(Sweeteners,preservativesandaddedcolor– legalinthecaseoffortifiedwineonly– mustbedeclared)Exemptforproductsmadeofoneingredient.Netvolume(ml):Thisshouldbemarkedas‘netcontentxxxMl(ml)’forbottlesizesunderaliter,or‘netcontentxLiters(l)’forbottle sizesoveraliter.Forpackagesupto(andincluding200ml)theminimumprintheightis3mm. From200mluptoandincluding1liter, theminimumprintheightis4mm. Forpackagesgreaterthan1litertheminimumprintheightis6mm.Alcoholcontent(%):Thealcoholstatementshouldbeinthe‘Alcoholicstrengthxx.x%vol’format.Productiondate(yy/mm/dd):ThedateofbottlingisrequiredonChineselabels.Producer/Distributor/Importer(Nameandaddress):ThenameandaddressoftheChineseagent,importerordistributormustbeshownonthelabel.Thenameandaddressoftheproducerisnotmandatory,howeverifincludeddoesnotneedtobetranslatedintoChinesecharactersCountryoforigin:Acountryoforiginstatementismandatory.ImporterswillusuallyrequestaCertificateofOrigintoconfirmthisclaim.Minimumdurabilitydate:Wineswithanalcoholcontentof10%orlessarerequiredtoincludeaminimumdurabilitydate.ProductType:(i.e.GrapeWine,‘red’,‘white’,‘sparkling’,‘semi-sparkling,‘fortified’,‘sweetenedfortified’,etc.)Sugarcontent(g/L)MandatoryWarningStatements: ThefollowingandotherwarningsmustbeonthebottleinChinese:"Excessivedrinkingisharmfultohealth"or"Pregnantwomenandchildrenshallnotdrink". Forbeeringlassbottlesalsoadd"Donothit;itmightcauseexplosionofthebottle".

Required Documentation


• Commercialinvoice• CustomsValueDeclaration• FreightInsurance/documents• PackingList• InsuranceCertificate• CertificateofOrigin(fordistilledspiritsandmaltbeveragesonly)• CertificateofHealth/Sanitation(fordistilledspiritsandmaltbeveragesonly)• CertificateofAuthenticity/FreeSale(fordistilledspiritsandmaltbeveragesonly)

International Analysis


AustraliaFocusedinlowandultrapremiumwinesegmentsHasonlyhalfthemarketshareofFranceLessthanhalfoftotalUSoutput

FrenchwineshaveseentheirmarketsharesteadilydeclineFocusedprimarilyonultrapremiumwinesConsumersshiftingslightlytowardsmoreaffordableSellinginhighendrestaurantsandbarsDifficultgrowingseason

Internet Retailing vs. Store-Based Retailing for Off-Trade Sales


%ofOff-TradeSales2011 2012 2013 2014 2015 2016

Store-BasedRetailing 98% 97% 94% 89% 85% 81%InternetRetailing 2% 3% 7% 11% 15% 19%

ThousandsofLitres2011 2012 2013 2014 2015 2016 CAGR

Store-BasedRetailing 2,422.40 2,590.00 2,626.90 2,483.20 2,494.20 2,492.30 0.48%InternetRetailing 41.9 82.9 182.6 294.4 441.6 597.8 55.74%

SWOT


Strengths

• Numberofwineries• Variety ofwine• Strengthofindustryconditions

Weaknesses

• Notasstrongofareputation ascompetitors(i.e.California,Europe,Australia)

Opportunities

• Competitorsare havingabadyear(naturaldisasters,badgrowingconditions,etc.)

• ExpansionoutsideoftheUS• Onlinedistribution• UntappedmillennialmarketinChina

Threats

• Chinesegovernmentregulation• Costoftransportationandexporting• Australianmarketwine innovations

through the grapevine - foster school of business...harvesting | pressing | fermenting | clarifying...

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